8 Questions You Might Have About the Debt Ceiling

Mark that day on your calendar. According to Treasury Secretary Jack Lew, that's when -- give or take a few days -- the U.S. government could effectively run out of cash and be unable to pay the nation's bills, potentially defaulting on our debt for the first time in history.

Why?

In May, the government hit the debt ceiling, which prevents it from borrowing more money. We've been able to keep the lights on until now because Fannie Mae and Freddie Mac repaid a huge portion of their 2008 bailout funds, and the Treasury juggled around money in intra-government pension funds to stretch out our cash. But after Oct. 17, the game is up.

The odds are still overwhelming that Congress will raise the debt ceiling to avoid default. This is the third time we've done this political dance in as many years. But this showdown looks especially precarious -- neither party shows any sign of giving in. "Make no mistake," Potomac Research Group wrote this week, "this will become a genuine crisis, far more ominous than the threat of a government shut-down."

Questions? Let me see if I can help.

What is the debt ceiling?It's a self-imposed limit on how much the nation can borrow.

Here's how it came about.

Before 1917, Congress had to approve each new debt issuance. If it needed to borrow money for a specific project, it had to pass new legislation deciding on the bond's maturity date and interest rate.

This became too burdensome once World War I hit. Congress slowly loosened the rules on individual debt issuances before removing them entirely in 1939. Still, it didn't want to make borrowing open-ended. So Congress basically told the Treasury, "You can borrow this much money. Go figure out the best way to do it." This "gave the Treasury freer rein to manage the federal debt as it saw fit ... with maturities that would reduce interest costs and minimize financial risks stemming from future interest rate changes," according to the Congressional Research Service.

Once we hit the debt ceiling, Congress goes back and raises it again. Rinse, repeat.

What's the purpose of a debt ceiling if we raise it every time we hit it?Many political scientists, economists, and budget analysts have asked that question. Most seem to come to the same conclusion: It's pointless. There's a theory that the debt ceiling can be used as a "precommitment device," or a tool that prevents us from doing something bad in the future. But since it can be lifted at any time, it doesn't do much besides boosting C-SPAN's ratings a few times per year.

Doesn't it control spending?Not really.

It can be used as a bargaining chip, but the debt ceiling has no direct link to the normal annual budgeting process. Budgets are passed nearly every year that will require borrowing in excess of the debt ceiling limit. When Congress authorizes these budgets, there's an implicit assumption that they'll also raise the debt ceiling.

The need to raise the debt ceiling isn't so much about controlling future spending as it is paying for spending Congress has already agreedto. Two budget votes take place in Washington: one to decide how much to spend (the budget) and another down the road to decide whether we want to pay for that committed spending (the debt ceiling).

What other countries use a debt ceiling?Denmark. No one else. And Danes are practical about it. They've only had to raise their debt ceiling once since the early 1990s, and politicians nearly doubled it so the issue won't pop up again soon.

How often has America's debt ceiling been raised?Since 1940, 99 times -- or an average of every nine months. Here's how many times the debt ceiling has been raised under each president since 1940:

President

Number of TimesDebt Ceiling Was Raised

Roosevelt (1933 -1945)

6

Truman (1945 -1953)

2

Eisenhower (1953-1961)

8

Kennedy (1961-1963)

5

Johnson (1963-1969)

8

Nixon (1969-1974)

9

Ford (1974-1977)

6

Carter (1977-1981)

9

Reagan (1981-1989)

18

GHW Bush (1989-1993)

9

Clinton (1993-2000)

6

GW Bush (2000-2009)

7

Obama (2009-present)

6

Source: Office of Budget and Management.

What happens if we don't raise the debt ceiling by Oct. 17?The government won't be able to pay all its bills. Everything from Social Security payments to soldiers to park rangers to interest on the national debt.

The government still takes in a lot of tax revenue -- about $2.7 trillion this year. That could pay some (even most) bills. But deciding who gets paid and who gets stiffed is tricky, both legally and logistically.

One idea is that the Treasury can prioritize payments on things like soldier pay and interest on the debt. But the Treasury says it's not equipped to do that. It processes several hundred million checks each year, and its computer system isn't set up to pay in any other order than first come, first served. The Inspector General said as much last month:

While Congress enacted these expenditures, it did not prioritize them, nor did it direct the President or the Treasury to pay some expenses and not pay others. As a result, Treasury officials determined that there is no fair or sensible way to pick and choose among the many bills that come due every day. Furthermore, because Congress has never provided guidance to the contrary, Treasury's systems are designed to make each payment in the order it comes due.

Some legal scholars also say that if one person (say, a government vendor) isn't paid so that someone else (say, a Medicare recipient) can be made whole, the vendor could sue the government for unlawfully prioritizing. That brings up a whole new set of problems.

And while the Treasury takes in a lot of tax revenue during the year, it's not like a worker's stable paycheck that arrives in equal amounts every other Friday. It's lumpy. Check out the Treasury's daily cash-flow statements. On Tuesday of this week, it took in $11.6 billion of tax revenue. On Sept. 3, it took in $127 billion. On Aug. 19, it brought in $4.1 billion. In February, it took in $122 billion. In April, $406 billion.

When payments are lumpy and the Treasury is unable to borrow, a point will eventually be reached where we'll have, say, a $50 billion interest payment due but only $10 billion of tax revenue coming in the door that day. Short-term cash-flow problems, not total annual revenue, are what make a debt default unavoidable without raising the debt ceiling. (It's also why the government still borrows from time to time when it's running a surplus.) This is exactly the situation we faced during the debt-ceiling showdown earlier this year.

Does not raising the debt ceiling make us bankrupt?Bankrupt, no. Deadbeat, yes. America can pay its bills. Whether it has the will to do so is another story.

What should I do with my investments?Probably nothing. There is never a good time to panic. If you were comfortable with your investments last month, you should be comfortable with them next month. However hairy this gets, we'll get through it. Turn off the TV, and take the long view.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

More on the economyFor more about how the nation handles its debt, check out our report, "Everything You Need to Know About the National Debt." It walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read it.

Comments from our Foolish Readers

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Useful information. I understand the need to have some sort of "bully pulpit" for debt issues (and that infinite debt is not good); however, I think it's outrageous that a small group of lawmakers can have such leverage to prevent America from paying its bills. America's debt should not a bargaining chip.

When's the last time both houses of congress have passed a Federal budget? This article seems to assume they negotiate out the amount they borrow through the annual budget process. But, I'm not aware that that has been true for about the last four years. It seems the lack of real negotiations on the budget process force us into this situation.

There is one possible benefit to having a debt ceiling. It generates a discourse with some urgency around it.

If you believe that government needs to be closely watched by its citizens, then having a debt ceiling can be a good thing. A dept ceiling can be thought of as a 'gate' that must be passed through by having a public discussion about how our government is spending our money.

"Simple" solution would be to eliminate the debt ceiling and make it a law that a balanced budget must be passed. After a decade of cutting some fat out of our spending, start a plan to reduce the debt by a certain amount or percentage each year until the debt is eliminated. Once the debt is paid off, we can invest heavily into our country and not be giving out billions of dollars in interest.

@CinCity A balanced budget is all well and good, but what happens when an unexpected emergency pops up (e.g. hurricane, floods, forest fires, etc.) but there is no money in the budget for it? Barring some sort of well funded emergency fund - in which case what would well funded be - how does the government plan for the unexpected? I'm as much for paying off the national debt as the next person, but there are a lot of practical issues with a perfectly balanced budget that aren't easy to deal with at a national level. Remember, households have issues with unexpected emergencies, now imagine that at the national level.

This isn't a cause of anything, it is a symptom. Our leaders make promises to spend other peoples money to buy the votes of the people they are making the promises to. Any time you have one group spending another groups' money, it is a recipe for squander.

"Elections are kind of neat, too". Only if there were a law against lying about elections like there is a law against lying about dog food. But as it is now, it is one PR firm's slogans against another PR firm's slogans. Very rarely do most voters actually know much about the choice they are making. And when you can promise to donate other peoples' money to win the election, it's hard for a Foolish thinker to speak the truth and get elected. They get shouted down by the gimmie forces.

If Boeing engineers won important design arguments the way politicians win arguments over public policy, I would never ride on a plane.

Most politicians are lawyers. Lawyers are trained to win arguments, using whatever facts and spin they can find. Engineers are trained to figure out how to make something work. Big difference.

The problem is, we are spending more than we take in. That requires borrowing, which we have to pay back with interest. Subsequently, we borrow more money to pay that interest, which we also have to pay interest on, so we're incurring interest on interest.

We need to reign in spending. If a person spent like that, that person would be bankrupt in no time.

1. Eliminate the Dept. of Energy. It has never created any energy.

2. Eliminate the Dept. of Education. There are 50 state Departments of Education in this country, more than enough.

3. Eliminate the EPA. Let state equivalent agencies handle this. The only federal bureau we need in this area is a very small agency to mediate between 2 or more states, should there be an interstate situation and the states involved couldn't work it out on their own.

4. Institute the Connie Mack Penny Plan. Every dollar in the federal budget is reduced by one penny. Review after a couple of years, with the option to make it two pennies.

The debt ceiling is always raised, never lowered. It allows those who want ever bigger government to add new benefits, programs and entitlements whenever they want. And as dependance on government grows so does the loyalty of voters to support ever larger benefits, programs and entitlements. They are bribes used to buy votes and elections on a national scale. Germany found this to be very desirable and effective prior to, and during, WWII. It was called the Reichstadt. Didn't you ever wonder why the Reich held such fanatic loyalty right up to the end?

The Nazis made several interesting economic decisions among them not allowing the Reichsmark to be convertible against other currencies. None of those moves are particularly relevant to the US in the 21st Century.

The hypocrisy is that the very Representatives most objecting to the debt ceiling have voted each & every dime of spending comprising the debt.

We had a balanced budget a dozen years ago. Some politicians thought that tax cuts were more important.

We can blame the politicians all we want but we, the citizens put them into office.And, incumbants usually win re-election even though the poll numbers for Congress are in the basement. My representative is OK; yours must be the skunk.

MrJimMcKee, Citizens want what the government is offering; we just want more of it.... How do I know this is true? Just try to eliminate a federal program. Sure, different groups have their favorites as well as their enemy list of programsthey would love to cut out.However, a negotiated deal gets harder and harder to achieve as our politics grow more polarized by the day.I'm as happy as the next guy to blame some politicians but they are accountable only to the voters and it is hard to get us to the polls let alone vote someone out of office. Nothing will really change until the citizenry changes. Until then, it will be a very bumpy, ugly ride.

"One idea is that the Treasury can prioritize payments on things like soldier pay and interest on the debt. But the Treasury says it's not equipped to do that. "

Horse Puckey! I worked in IT. both as a computer operator and as a programmer in the Payroll Section. Selection/prioritizing can be done on any field of an employee's P/R record. It is a trivial change that can be done as-needed basis or made permanent.

When the government "shutdown" comes, many peon workers will be furloughed as has happened in the past but I bet dollars to donuts that the Congress critters never miss a check. Just goes to prove that Treasury IS equipped to prioritize. Maybe if the Congress critters and high government officials (President, VP, Cabinet members) had to work without getting paid for a while, we wouldn't have this brinkmanship.

The number of times the debt limit was raised seems to be a rather disingenuous metric. Wouldn't it matter more by what proportion it was raised?

For those that remember, then senator Obama called Pres. Bush unpatriotic for spending increases. Since Pres. Obama's has been in office, we have had $1trillion dollar deficits every year. Let's do the math. $(1*10^12)/(314*10^6) = $3184.71. That is the per capita debt added each year.

There is a whole world in the word ``can'' in this excerpt: ``It can be used as a bargaining chip, but the debt ceiling has no direct link to the normal annual budgeting process.''

Yes, it ``can'' if what you are trying to accomplish is collapse the government, embarrass the president who beat you -- twice -- and to subvert settled law that has been vetted all the way up to and through the Supreme Court of the United States.

You ``can'' use it as a bargaining chip if you're a Speaker of the House completely dominated by anarchists from the right wing of your party.

To use your suggested metric, to date the debt ceiling under President Obama has increased by 44.9%. At the same point in President Reagan's administration is had increased by 68.2% and at the same point in the President G.W. Bush's administration it had increased by 50.7%. Over the eight years of the Reagan administration it increased by 199.4% and over the eight years of the Bush administration it increased by 90.2%.

The preliminary deficit for the first 11 months of FY 2013 was $753 billion and the deficit for the full year will be lower than that because there will be a surplus for September.

This is not a question of we've always raised the debt level. The US is at a crossroads. When interest rates revert to the norm of the last 20 years, 90% of tax receivables will go to debt service. That leaves only 10% of all taxes to pay for everything (not counting the current ~43% of borrowing in addition to taxes). What do we do - raise taxes hugely? Cut almost all programs? Stop paying social security and medicare? Eliminate the military? Liberals say we will grow our way out and monetize the debt...well we aren't growing and the dollar has already been hugely debased. Couple that with the pending loss / diminishment of the US dollar as reserve currency and you have SERIOUS problems. The politicians got us into this...it may take another revolution to reboot the country. It is this possibility that has politicians at all levels wanting guns limited, putting currency controls in place, militarizing the police, etc. Believe it...I know.

Why is there a "budget debate" at all if there is no agreement doesn't the sequestration which was approved just go into effect for next year? I thought the automatic cuts agreed to ran for ten years unless a different budget passed?

Seems like Congress should pay for what they spent (raise the debt limit) and allow sequester cuts to slowly balance the budget and cut spending unless something different could be agreed to.

It is very difficult to agree however when the House won't even appoint conferees and discuss differences with the Senate passed budget.

This happens when the Congress (Government) does not want to pay for what they earlier promised. Yet people still say that America is good for business? Or just a joke being made official, since CSpan has been boring.

S&P 500 is up +3% in September in a a good agreement with the buy signals on this S&P 500 chart: //iknowfirst/SP500-forecast-August-1-2013 (September statistics is not good for stocks) and this September performance endorse the market strength

This is the result of a gerrymandered House. The Democrats received ~1.5 million more votes than the Republicans in 2012, but are still the minority party. It makes no sense, but the good news is that there is no way that It will go on forever.

Other than open rebellion, there's only one thing we can do to help: VOTE NO FOR INCUMBANTS. It's that simple. EVERY INCUMBANT. Everybody seems to know congress is dead and buried. They are working against america and for themselves, not us. So next time you have a ballot in your hand vote against any political representitive that is in office already. Congress only acts when their jobs are in danger. If we dump most of them next election, they will get the message. ANd we will get a congress that works for america, not the unions, lobbiests, not for themselves.

It is very disappointing that NOBODY seems to understand the HORRIBLE possible (likely) remifiactions of an ever increasing National Debt.

We go along, as do our elected officials, as if there the National Debt is of NO CONSEQUENCE! WRONG!

Last year, the interest on the National Debt was $415.7 BILLION. The effective interest rate was 2.53%.

It was only 15 years ago that the interest on the National Debt was 6.65%. Were that the rate for next year, without ANY INCREASE in the National Debt (clearly it will be higher!), the interest would be $1.1TRILLION!

Even worse, with all the flooding of newly created money (electronicly produced), if the interest got to the levels of 1997 (18.5%), the interest alone would be $3.03 TRILLION - that is more than ALL THE FEDERAL TAXES FROM ALL SOURCES, LAST YEAR.

Anyone that ignores this reality simply is living in a dream world!

We are headed toward a true catastrophy!

Yet,, the Motley Fool, as well as all those commenting on this article, simply ignore this critical issue, as if it couldn't happen.

Thanks; good to have some facts about this subject for a change. IIRC the USA has run deficits of some sort for nearly all of its history. A nation's budgets don't need to be balanced, just kept within reason. Obviously too much debt is bad, but some is unavoidable. The trick is to make sure it doesn't get out of hand.